LITTLE ROCK — After hearing anti-tax activist Grover Norquist speak at a meeting of the Center-Right Coalition in downtown Little Rock, state Rep. Jon Woods and state Rep.-elect Justin Harris talked of their desire to enact tax cuts.
And they’re not alone.
The next legislative session is less than two months off, and tax-cut talk is all the rage - among Republicans and Democrats, the executive and legislative branches, talking about cuts aimed at helping a spectrum of people ranging from the poor struggling to put bread on their tables to the financially better-off making capital gains.
Woods has drafted legislation to repeal the corporate franchise tax.
Harris wants to eliminate the capital gains tax.
The governor wants to lower the tax on groceries.
And other ideas are in the wind.
The backdrop for the talk is a state budget that, while growing overall, has been strapped for general revenue (derived mostly from the sales and income taxes) for a couple of years because an economy in recession has been slow to turn more vigorous.
And some of the tax-cut theories bank on expectations that cannot be proved at this time.
Woods, a Republicanfrom Springdale, for example, said he believes revenue will grow more than is forecast, so eliminating the franchise tax could in his view simply eliminate surplus revenue. The tax raised about $22 million last fiscal year, according to the Department of Finance and Administration.
Also there’s generalized talk about cutting state spending (the total budget tops $24 billion including federal funds; about $4.5 billion is general revenue) and eliminating waste, but when it comes to particulars so far all that’s been cited is a $50,000 grant and a few thousand on legislative travel, hardly a dent in the budget.
Harris, a Republican from West Fork and one of a dozen Republicans who will be on the 20-member House Revenue and Taxation Committee, said while discussing tax-cut prospects, “We haven’t even looked at cutting back, to see where we can make cuts, and start cutting back the budget. ... We have to look at the top pay of these administrators that are making beaucoup of money.”
During the coalition meeting at which Norquist spoke and which was attended by about 50 people, Arkansas Family Council President Jerry Cox distributed a copy of his group’s agenda, which calls for a tax credit for stayat-home parents and developing a plan to phase out the sales tax on used cars.
Even with Republican gains in the Legislature, Cox said, “No bill is a given, but I think we have a better shot with these than in quite some time. It’s not just Republicans. It’s the people who want to do right for the poor and families who might get a tax break.”
The number of Republicans in the House of Representatives will increase from 28 to 44 and Democrats will drop from 72 to 55.
House Speaker-designate Robert Moore of Arkansas City, who will be one of eight Democrats on the Revenue and Taxation Committee, said the increase in Republicans “gives a greater possibility” that lawmakers may send Democratic Gov. Mike Beebe tax-cut legislation that he will veto to balance the state budget.
House Republican leader John Burris of Harrison, a member of the tax committee, said he wants to figure out the priorities of the House Republican caucus and how they match the priorities of House leaders and Beebe, then see what can be agreed on.
“If there is a goal, it is to pass substantive, real tax reform that creates jobs and makes Arkansas more business-friendly. We are not just going to pass bills out [of the committee] just because we can. We want to have a real debate about our tax policy, which needs some reform, and see what we can agree on, and I think we can agree on a lot. That’s what we will pass out.”
Asked whether the committee would pass much legislation that it knows Beebe would veto, Burris said he’s only one vote on the committee.
“At the end of the day, I’m not going to tell anybody how to vote,” he said. “What the committee does will be a result of how the discussion goes, but I think the discussion is going to go well.”
As for whether he’ll support Beebe’s plan to cut the sales tax on groceries from 2 percent to 1.5 percent, Burris said, “It is always hard to oppose tax cuts, but I want to be sure we are cutting the right taxes, so we’ll have to look at it and see.”
Beebe’s cut is projected to reduce state revenue in 2012 by $20.8 million.
The governor has outlined a $4.59 billion general-revenue budget for fiscal 2012 that holds most agencies’ spending flat and gives a small increase to colleges and universities. The proposed budget is 2.5 percent higher than the current fiscal year’s. The biggest increases would be $55.1 million for the Public School Fund and $23.3 million for state-employee raises of 1.86 percent.
Burris said he expects debate about tax cuts to center on the capital-gains tax, the corporate franchise tax, sales tax on used cars, sales tax on groceries, sales tax on manufacturers’ energy, income taxes on active-duty military personnel, and adjusting the income-tax brackets.
Moore said representatives are inclined to support Beebe’s grocery-tax cut. “Most people think it is the right thing to do,” he said. “It’s whether we can afford it.”
He said he expects robust debate about the taxes on capital gains, manufacturers’ energy use, and active-duty military personnel’s income taxes.
Rep. Kathy Webb, a Democrat from Little Rock and cochairman of the Joint Budget Committee, is interested in changing a state law under which a single parent (with two or more children) making less than the federal poverty level may have to pay state income tax, but a married couple with the same number of dependents and income won’t. Legislation to exempt such a single parent failed in a Senate tax committee in the waning days of the 2009 session.
She said she’s also interested in creating a state earnedincome tax credit to echo the federal credit that would reduce state revenue by about $30 million.
“Of course, I would like to support the grocery-tax cut, but I want to see if the benefit for lower-income families for the earned-income tax credit and closing the loophole on the head of households would outweigh the benefits of the grocery-tax [cut],” Webb said.
In the Senate, Republicans will increase their ranks from eight to 15 and Democrats will decline from 27 to 20.
The Senate tax committee will be composed of four Democrats and four Republicans. Republicans generally view state Sen. Jerry Taylor, a conservative Democrat from Pine Bluff, as a potential ally.
Taylor said he’s not sure whether he’ll support cutting the sales tax on groceries. He’s worried it will help “the underground economy,” which he said includes drug dealers.
“Look at the money they make. When they go buy groceries, that’s the one tax they pay, and your really poor folks, the people who need help, 90 percent of them are on the food stamps, and that’s exempted [from the sales tax],” Taylor said.
Sen. Larry Teague, D-Nashville, who will be chairman of the Senate tax committee, said, “I can’t imagine [Beebe] not getting his half-cent” cut on the grocery tax.
“I think that’s a commitment that he made, and I want to help him get there,” he said.
Like Webb, Teague said he would like to allow a single parent with two or more children making less than the federal poverty level to be exempt from income tax.
The finance department estimated such legislation would have reduced revenue by $3.6 million in fiscal 2010.
GARNER PLAN
Last week, state Rep. Ed Garner, R-Maumelle, prefiled House Bill 1002 to exempt from the capital gains tax the sale of any Arkansas property. That would include stocks and interests in businesses and the sale of tangible property.
In 2009, similar legislation by Garner failed to clear the Senate tax committee. The state finance department estimated that measure would reduce revenue $42.8 million in fiscal 2010 and $65 million in fiscal 2011.
Garner said his legislation would help the state retain investment capital and create jobs. He said he’s not convinced that eliminating capital-gains taxes on new investment has “any dramatic impact on the current budget” and he insists that it would increase tax revenue through the creation of jobs.
He said he would probably vote for Beebe’s grocery-tax cut.
“I don’t think the state of Arkansas government has really suffered because of the [budget] cuts we’ve made,” Garner observed, referring to nearly $250 million in budget cuts that Beebe ordered last fiscal year due to tax revenue falling short of projections.
“I am sure there are demands for education and there are demands for prisons, but we really need to hold the line on government spending and then stimulate job growth,” Garner said. He said the Medicaid program eventually is going to have to be trimmed no matter what, but he declined to cite any particular programs when asked what he’d cut.
Teague said he’s confident the House will approve Garner’s legislation.
“I think it is a good idea,” he said. “I like the concept. I am not a capital gains tax fan, but we just got to see whether we can afford it. It’s too early to say.”
The finance department says 13 percent of taxpayers have capital-gains income and “80 percent of all capital gains income is received by taxpayers with at least $100,000 income.
“Middle- and low-income average working taxpayers are not very [likely] to have capital-gains income,” said Tim Leathers, deputy director of the department. “When they do, they currently get a 30 percent break on the resulting tax.”
Beebe insisted that the state can’t afford the legislation.
‘NEBULOUS STUFF’
“People that propose tax cuts should have the courage and the honesty to say what you are going to cut in spending,” Beebe said. “Nebulous stuff about ‘Well, we are going to cut waste’ is nice rhetoric.But in the real world everybody is trying to cut waste all the time. Show us specifically what you are going to cut, specifically to make [the budget] balance.”
Beebe said Garner has repeatedly insisted his capital gains tax-cut legislation won’t cut revenue but will increase it by creating jobs.
“When?” asked Beebe. “Ten years? Twelve years? In the meantime, what do you do in the next two? What do you do in the next three? We’ve had our experience with trickle-down stuff before.”
On Nov. 2, Beebe won reelection touting net tax cuts of about $500 million over four years, including cutting the sales tax on groceries from 6 percent to 2 percent and the sales tax on manufacturers’ energy use from 6 percent to 3.25 percent.
During his first four-year term as governor, he worked with legislative leaders to bottle up tax-cut bills that he opposed.
When asked whether Republican gains in the Legislature caused him to worry that he might be sent tax-cut bills he would have to veto, Beebe said, “Sure, you never know. But it’s not just this time.”
Recalling his 20 years as a state senator, he said, “Everybody loves tax cuts.”
But “ultimately people recognize that even though they may be pushing something that is of particular interest to them, responsibility ends up taking over,” Beebe said. “People have to be an adult about this stuff and make sure that the budget gets balanced.”
AMAZON TAX
On another tax issue, state Rep. Uvalde Lindsey, a Democrat from Fayetteville who will serve on the House committee, said he expectslegislation to be introduced patterned after a New York law to collect tax owed on sales by online merchants.
In 1992, the U.S. Supreme Court held that sellers are not required to collect tax from customers unless the seller has a physical presence, also known as a nexus, in the state where the customers live, according to Tom Atchley of the finance department. Thus, online merchants don’t have to collect tax and the burden falls on the customers to track their online purchases and calculate and remit theapplicable tax.
In 2008, New York passed the first of what now are commonly referred to as “Amazon tax” laws. It declared that affiliates of online retailers qualified as a nexus. North Carolina and Rhode Island passed similar laws, he said.
Earlier this month, the appellate division of the New York Supreme Court upheld New York’s law, Atchley said.
Lindsey sees the legislation as a potential opportunity for the state to collect as much as $100 million more a year and “undertake meaningful [tax] reform whether it’s rates or application or raising the lower limits on the incometax brackets, so everyone gets the benefits.”
“We obviously would like to go forward with the governor’s blessing,” he said.
Beebe said no one has approached him about Arkansas enacting legislation similar to New York’s.
But, he said, “We want to take care of our Arkansas businesses and not have them in a noncompetitive situation with out-of-state mail-order firms, and we will look at each and every thing that other states have tried or are trying that would be legal.”
Arkansas participates in the multistate Streamlined Sales and Use Tax Agreement that encourages “remote sellers” selling over the Internet and by mail order to collect tax on sales to customers living in the states in the agreement. But Congress hasn’t enacted legislation to require sellers to participate. In calendar year 2009, the state collected $5.1 million in state taxes and $2.1 million in local taxes under the agreement, according to the finance department.
Burris called legislation to enact a law such as New York’s “an interesting concept,” and said he wouldn’t be a strong advocate for or against it.
UNEMPLOYMENT TAX
As for a possible unemployment-insurance-tax increase on businesses to help pay off a loan from the federal government, Burris said any tax increase on business in general “will be a hard sell. I’m not even convinced that we need it.”
Burris, Garner, Harris and Woods are among 16 state representatives who have signed Norquist’s Americans for Tax Reform pledge to oppose all tax increases, according to the group’s website. Six of those representatives will be on the House taxation committee.
Three state senators, Lt. Gov.-elect Mark Darr and Secretary of State-elect Mark Martin also signed the pledge.
Teague said he’s “not convinced that with the business environment like it is that increasing business taxes at this point is a good idea.”
“By February, maybe we can see more signs of life,” he said.
Labor and management officials negotiating over the state’s unemployment-insurance tax and benefits said last week that they each favor requiring businesses to pay more but disagree on the levels of benefits the unemployed should receive.
The federal government has lent the state $330 million to help pay unemployment benefits because of high job losses during the economic downturn, according to the state Department of Workforce Services.
Randy Zook, president of the Arkansas State Chamber of Commerce, said the state has to find a way to pay back the $330 million and having business pay more in state unemployment taxes will help keep the federal government from imposing more stringent measures, such as raising the federal unemployment-tax rate.
Front Section, Pages 1 on 11/21/2010